Managing Governmental Risk

In 2012, the words "dysfunctional" and "government" go hand in hand. As a result, the stakes for businesses that are regulated by, receive funding from or otherwise intersect with government at its various levels never have been higher.

While the Fall elections are on everyone’s mind, regardless of the outcome, the country again will experience serious political brinksmanship shortly thereafter. Congress will grapple in its lame duck session with the expiring Bush tax cuts, the need to again raise the debt ceiling, looming cuts to the federal budget, expiration of the payroll tax cut, and appropriations for the upcoming government fiscal year – and those are just a few of the issues. Congress will try to address these issues against a backdrop of a still struggling economy, financial regulatory reform, health care reform, and a lingering political hangover from the 2008 financial crisis.

"Governmental risk is intertwined with a variety of other risks facing the enterprise, including, among others, reputational risk and compliance risk."

Uncertainty reigns, and the government is playing a historically disproportionate role in the private sector. So, how does an organization effectively manage its governmental risk, i.e., the potential for government action or inaction to frustrate its business objectives, and turn that risk into a business opportunity?

First, analyze governmental risk as its own distinct risk category. Second, develop a basic understanding of the ways in which government can impact the organization. And third, develop and execute a macro and micro strategy for addressing governmental risk.

Governmental risk is intertwined with a variety of other risks facing the enterprise, including, among others, reputational risk and compliance risk. To effectively address governmental risk, however, an organization should conduct an annual governmental risk assessment and inventory governmental risks across the enterprise. Senior management should prioritize addressing those risks that pose the greatest threat to the organization.

To evaluate the risks that an organization faces at its intersections with government, management needs to have a framework for understanding government. The "three Ps" – policy, politics, and process – guide government decision making and provide a useful reference for a management team thinking about how to mitigate governmental risk.

Government policy is the public goal that the government is attempting to achieve, and it is, at times, hard to comprehend or rationalize, from a private sector perspective. Government policy usually reflects an effort to balance various interests, as opposed to profit and loss that guide private sector activity.

Politics influences government decision making at a number of levels. The public is most accustomed to thinking about this in the context of the two party system, Republicans and Democrats. And while those politics surely matter, more often politics revolves around things such as home state interests, job creation, and the need to show progress on signature initiatives.

Process – the manner in which the government arrives at and executes decisions – is the most misunderstood component of government. For example, if one is attempting to influence legislation, knowledge of the legislative process is as important as enlisting policy support for a bill. Likewise, in the executive branch, it’s critical to understand that there are stark differences between the way career civil servants and political appointees look at and address issues.

Depending upon your organizational needs – for example, getting business from the government or keeping the government out of your business – an organization may employ offensive or defensive strategies or both. Simply knowing a member of Congress or other Washington "big wigs" is not a strategy. A strategy needs to account for every moving part in government that impacts your risks. Identify your political assets and liabilities. Who are your friends? Who are your enemies? How does the geography of your organization impact your influence in Washington? Map out the government decision makers impacting your organization and think through those officials’ perspectives on key issues and develop a plan to advance your interests.

In executing a strategy there are a few keys. Build relationships early enough in the process of the particular initiative you are trying to advance to be able to have a meaningful dialogue with decision makers. Follow the "no surprises rule" – stay out in front with key officials on all issues, good and bad. Perhaps, most importantly, the most difficult time to mitigate any risk, but particularly governmental risk, given the potential legal and public relations consequences, is when crisis already has struck. So don’t wait.

For many businesses, nothing seems more remote than the maneuvering of Beltway insiders. But what happens in Washington and in state and local government is critically important to your company and your industry. With government more involved in business than at any time since the 1930s, organizations that can negotiate the government labyrinth of politics, policy, and process will come out on top.

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